The Stability Pool Explained: How Staking USDL Maintains System Solvency and Earns Yield

The Stability Pool is arguably the most important component of the Liquid Loans protocol.

Without it, USDL would be at risk of under-collateralization and could end up depegging from its target price.

Luckily, the Stability Pool exists, and it supports the most robust stablecoin in PulseChain and all of DeFi.

It also provides interesting risk-off yield generating opportunties.

Read on to learn more about this special kind of liquidity pool.

What is a Liquidity Pool?

A liquidity pool is formed when two crypto assets are paired together, in equal dollar value amounts, and offered up to an automated market maker (e.g. Uniswap). If people then come along and wish to trade between the assets in that pool, then the liquidity in that pool – in other words, the assets that were placed into the pool – is used to facilitate the trade.

The ‘Stability Pool’, however, is a bit different.

What is the Stability Pool?

The Stability Pool serves as the primary safeguard to uphold the system's solvency, acting as a crucial liquidity source for repaying debts originating from liquidated Vaults. Its fundamental role lies in ensuring that the total supply of USDL remains consistently backed.

When a Vault undergoes liquidation, the Stability Pool's balance is utilized to burn an equivalent amount of USDL, settling the remaining debt. As part of this process, the entire collateral held within the Vault is transferred to the Stability Pool, reinforcing its liquidity reserves.

Unlike a liquidity pool, the Stability Pool in the Liquid Loans protocol is one-sided, meaning only one asset – namely USDL stablecoin – can be placed into it.

How Does the Stability Pool Work?

The Stability Pool works in three steps:

Step 1

In a liquidation, all of the PLS in the liquidated vault gets distributed to the stability providers.

STEP 2

The Stability Pool pays back the amount of USDL owed by the vault.

STEP 3

The system state reaches equilibrium as the un-collateralized vault is closed out.

Benefits of Being a Stability Provider

As a Stability Provider, you are supporting the health of the system, and for doing so you’re rewarded in the protocol’s native token, LOAN. Plus, you also receive Pulse (PLS) when liquidations happen. This is because, by depositing your USDL into the Stability Pool, you’re essentially agreeing to buy PLS (at a discount) from Vaults being liquidated.

When a liquidation occurs, USDL is taken from the Stability Pool and used to pay off the undercollateralized loan, and the collateral in the Vault (i.e. the PLS) is distributed proportionally amongst the Stability Providers. For example, if you own 10% of the Stability Pool, then you receive 10% of the PLS from liquidations, whenever they occur.

Can I Lose Money as a Stability Provider?

Even though liquidations happen at a collateral ratio above 100% most of the time, in the unlikely event of a flash crash or an oracle failure, it is theoretically possible that a Vault could get liquidated below 100% collateralization. This would result in Stability Providers experiencing a loss since the collateral gain would be smaller than the reduction of their USDL deposit.

Note: In developing Liquid Loans, the team placed a great deal of importance on ensuring that the oracles used by the protocol are of the highest quality. Liquid Loans will have two oracles in place:

1. Primary Oracle - Fetch: A decentralized blockchain oracle forked from Tellor and launched natively on PulseChain
2. Secondary Oracle: To Be Determined

Put simply, the system is designed to reward Stability Providers, not harm them. For Stability Providers to make a loss, a dramatic “black swan” flash crash would have to happen, or all three oracles would have to fail simultaneously, which is extremely unlikely.

What Influences Stability Pool APR?

The Stability Pool APR fluctuates up and down for four different reasons:

1. The Number of Liquidations
2. The Size of Each Liquidation
3. The Collateral Ratio at the Time of Liquidation
4. Early Adoption

If you'd like more information of the factors that influence Stability Pool APR, click the link.

Can I Stake my USDL in the Stability Pool?

No, but you can deposit it there, and you can stake your LOAN token in the Staking Pool!

From a user’s point of view, there’s not much difference between depositing your USDL into the Stability Pool and staking your LOAN in the Staking Pool – you simply click a button, and there’s no time lock like with HEX, for example – but it’s important that the correct terminology is used so that the two functions don’t get confused.

When you stake LOAN in the Staking Pool, you receive daily rewards in the form of USDL stablecoin from the system’s borrowing fees, and PLS from the system’s redemption fees.

How To Participate in the Stability Pool

Participating in the Stability Pool is super easy and available to anyone and everyone.

First, visit the Liquid Loans mainnet, and follow this guide to get involved and start earning PLS and LOAN!